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Wednesday, April 2, 2014

SPX and NYA Updates: Long-Term Resistance

Monday's update anticipated that the S&P 500 (SPX) was headed directly to new highs, and confidence in that view was added during Monday's session, when SPX broke, back-tested, and held 1867. Tuesday's session closed at a new all-time high.

In today's update, we'll discuss the bull and bear cases and the zones to watch for each.

On Friday, I wrote: "Due to the
larger trend, this is probably bears' last shot to break these markets
down, so any strong bounces from here would likely lead to new highs."
That now applies to bulls in reverse (sans larger trend, of course).

If
the market is indeed plotting the head-fake whipsaw I talked about on
Monday, then we're likely to see a significant sell-off afterwards, as most traders
will be caught wrong-footed. This is because classic technical
analysis would see a breakout here as very bullish, with targets in the mid-to-high 1900's. After we examine the preferred count and the arguments in its favor, we'll also delve into
those more bullish potentials in a bit more detail.

The preferred count continues to see this pattern as a triangle, which has either taken the form of a symmetrical triangle or an ending diagonal. The pivot between those two options is 1887.

Here's a more detailed look at the potential symmetrical triangle, using the NYSE Composite (NYA):

SPX reached the key 1885-87 pivot yesterday, but in the event it sustains trade north of 1887, then the symmetrical triangle is in play. Interestingly, the textbook target for the symmetrical triangle also represents a long-term resistance zone.

I think one of the goals of trading ranges is to wear everyone out -- and in doing so, ranges sometimes serve the function of making traders a bit sloppy afterwards. While the range is underway, everyone becomes hyper-focused on the near-term charts; then some feel thrilled or relieved when the range finally breaks. Trend followers sometimes even become strangely complacent afterwards, due to the emotional release of stored tension that was generated by the range.

But I'd suggest we stay alert even if there's a sustained breakout over the 1887 pivot, because we have resistance showing up on the long-term chart, right near the symmetrical triangle's target zone:

So, put simply, the preferred count currently still anticipates that the new highs will turn into a head-fake and whipsaw -- but let's talk about the more bullish option as well.

Prior to the development of
the apparent triangle trading range, I had been viewing the bull
potential as wave i-up of v-up complete, with the correction as ii-down
of v-up (now also complete), and iii-up of v-up still to come. The
series of apparent three-wave moves which created the trading range
gradually drew me away from that wave count. At the moment, I'm no longer favoring it -- but because three-wave
moves aren't always what they seem, my original bull count isn't dead and I still have to continue to respect as
a viable option. That option will likely regain favor as the preferred count if the market sustains trade north of 1914.

In conclusion, the preferred triangle count accurately predicted the end of the trading range and the immediate new highs, which gives some additional credence to that count. Of course, we don't want to get too far ahead of the market or too rigid in our expectations, but the pivots continue to bear watching as potentially-important reversal zones. For the time being, I'm continuing to favor the view that the anticipated new highs are part of a terminal pattern. Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter: @PretzelLogic

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